As a personal financial planner, one of your tasks is to prescribe the allocation of available funds across money market securities, bonds, and mortgages. Your philosophy is to take positions in securities that will benefit most from your forecasted changes in economic conditions. As a result of a recent event in Singapore, you expect that in the next month investors in Singapore will reduce their investment in U.S. Treasury securities and shift most of their funds into Singapore securities. You expect that this shift in funds will persist for at least a few years. You believe this single event will have a major effect on economic factors in the United States, such as interest rates, exchange rates, and economic growth in the next month. Because the prices of securities in the United States are affected by these economic factors, you must determine how to revise your prescribed allocation of funds across securities.

1. How will U.S. interest rates be directly affected by the event (holding other factors equal)?
2. How will economic growth in the United States be affected by the event? How might this influence the values of securities?
3. Assume that day-to-day exchange rate movements are dictated primarily by the flow of funds between countries, especially international bond and money market transactions. How will exchange rates be affected by possible changes in the international flow of funds that are caused by the event?
4. Using your answer to (1) only, explain how prices of U.S. money market securities, bonds, and mortgages will be affected.
5. Now use your answer to (2) along with your answer to (1) to assess the impact on security prices. Would prices of risky securities be affected more or less than those of risk-free securities with a similar maturity? Why?
6. Assume that, for diversification purposes, you prescribe that at least 20 percent of an investor's funds should be allocated to money market securities, to bonds, and to mortgages. This allows you to allocate freely the remaining 40 percent across those same securities. Based on all the information you have about the event, prescribe the proper allocation of funds across the three types of U.S. securities.(Assume that the entire investment will be concentrated in U.S. securities.) Defend your prescription.
7. Would you recommend high-risk or low-risk money market securities? Would you recommend high-risk or low-risk bonds? Why?
8. Assume that you would consider recommending that as much as 20 percent of the funds be invested in foreign debt securities. Revise your prescription to include foreign securities if you desire (identify the type of security and the country).
9. Suppose that, instead of reducing the supply of loanable funds in the United States, the event increased demand for them. Would the assessment of future interest rates be different? What about the general assessment of economic conditions? What about the general assessment of bond prices?